Financials Unshackled Issue 45: Week In Review (UK / Irish / Global Banking Developments)
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Welcome to Financials Unshackled Issue 45, which covers key UK & Irish and select Global banking developments over the last week and is structured as follows:
Key Developments Review (FCA proposes loosening mortgage rules & other mortgage market updates; NatWest Group / Santander UK reported discussions; Monzo IPO news report; Metro Bank 1Q25 trading update; TSB 1Q25 update; AIB Group directed buyback; ECB stress tests)
Other Notable Newsflow (split between UK, Ireland, and Global)
W/C 12th May Calendar (UK & Ireland focus)
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Correction to Financials Unshackled Issue 44: I noted in the write-up on NatWest Group’s (NWG) 1Q25 results, in the context of its recently completed acquisition of Sainsbury’s Bank, that the broader Nectar rewards customer base presents a significant opportunity for NWG. For clarity, while Sainsbury’s Bank adds c.1 million new customer accounts to the NWG stable and therefore presents the bank with opportunities to penetrate those customers with more product and services as appropriate, the bank does not have access to the entire Nectar rewards programme customer base.
Key Developments Review
FCA proposes loosening mortgage rules; other mortgage market updates
The Financial Conduct Authority (FCA), on Wednesday, published its proposals to simplify mortgage rules. These proposals relate to: i) amendment to mortgage advice and selling standards; ii) amendment to the affordability rules for mortgage term reductions and remortgaging; and iii) the retirement of two pieces of non-handbook guidance.
On the proposed amendment to mortgage advice and selling standards, the FCA is seeking to make it easier for customers to enter into a mortgage contract without having to go through a formal process of receiving regulated advice, whereby a lender is required to perform a suitability assessment. All else being equal, this should bring the cost of writing a mortgage down a little. However, the regulator does not propose changing these rules in the case of higher risk customers (e.g., customers who are consolidating debt or those with lifetime mortgages).
On the amendment to the affordability rules, the FCA is proposing to remove the requirement for a full affordability assessment when reducing the term of a mortgage. The FCA observes that, out of 1.6 million borrowers who remortgaged in 2024, 83% stayed with their existing lender and 17% remortgaged to a different provider - noting that “There are several barriers or transaction costs, both in time and money, that make external remortgaging less attractive, even if cheaper options are available” and that these barriers don’t apply when completing an internal product transfer. The amendment to the affordability rules should open up the refinancing market and reduce the cost of refinancing relative to product transfers in my view, which is positive for the consumer.
On the retirement of two pieces of non-handbook guidance, the FCA is proposing: i) to retire FG13/7 which strengthened industry standards and conduct, particularly when dealing with legacy interest only (IO) borrowers who were at risk of being unable to repay the capital on their IO mortgage; and ii) to retire FG24/2, which required firms to clearly lay out the effect of the FCA’s rules and the range of options they have to support customers (Consumer Duty legislation has been introduced since the introduction of FGS24/2).
In overall terms the proposed changes represent a marginal dilution in consumer rights but should leads to reduced costs too, especially in the context of refinancings. That said, Consumer Duty legislation sets a high bar more broadly in the context of how financial institutions treat their customers and the proposed changes could hardly be described as anything like a marked shift to a one-sided system. It is sensible that the UK is having a grown-up debate about cost/benefit trade-offs associated with regulation as the opportunity cost of regulation is something that is missing from the discussion in other jurisdictions.
See press release here, Consultation Paper (CP25/11) here, and a speech by Emad Aladhal, Director of Retail Banking here. Useful synopsis in the FT here and The Times here too.
Separately, it is worth flagging in a mortgage market context:
Useful data published here by UK Finance on Thursday on residential mortgages outstanding and rate change scenarios. Notably, 85% of the stock of UK mortgages sit on fixed rates, the average balance outstanding on fixed rate mortgages is £168k (it is lower in the case of trackers and SVRs), the average current mortgage interest rate on fixed products is 3.65%, and average monthly payments (principal and interest) are £943pcm.
Rightmove’s weekly mortgage tracker (published here yesterday) shows that average 2Y fixed rates fell by 4bps last week to 4.63% while average 5Y fixed rates fell by 3bps last week to 4.60%. 2Y swaps were +7bps last week to 3.94% (implying mortgage spread on average rate basis of 69bps) while 5Y swaps were +6bps to 3.96% (implying mortgage spread on average rate basis of 64bps), which means that there has been some decent expansion in mortgage spreads in the last week.
Paragon Bank (PAG) issued a press release on Tuesday last here calling for government to phase the introduction of minimum energy standards for private rented properties to limit disruption to the rental sector and minimise tenant harm. The bank proposes that the government abandon its 2030 target of a minimum Energy Performance Certificate (EPC) of C for rental properties and change to: i) 2030 for new tenancies; ii) 2033 for extended tenancies; and iii) 2035 for all tenancies. This seems a very sensible proposal that is far more realistic than the current targets - and it is struck at the right time when Energy Minister Ed Miliband is feeling the heat.
NatWest Group / Santander UK reported discussions
The FT reported on Friday here that Banco Santander rejected a bid worth c.£11bn for its UK retail bank from NatWest Group (NWG) earlier this year on the grounds that it undervalued the business. The article went on to note that the approach is no longer live. The authors of the press report note that Santander’s recently announced disposal of 49% of Santander Polska to Erste Bank for cash consideration of €7bn lessens the likelihood that group management will pursue a sale of Santander UK. While I agree in part (in the context of the Santander Polska sale freeing up capital to reinvest in the Americas, in line with the stated strategy), I continue to strongly believe that the UK business has a ‘for sale’ sign hanging over it at the right price and that group management is likely keen to transact but only at a price point that is sufficiently attractive.
Santander UK plc, the ring-fenced bank reported a tangible equity position at end-FY24 of £10.37bn. Santander UK Group Holdings plc (the focus of my writings historically) reported a tangible equity position of £10.45bn at that same date (and £10.97bn at end-1Q25, backsolving using the ‘RoTE Overview’ Appendix set out on page 8 of the 1Q25 abbreviated accounts). So, it appears that NWG bid a fractional premium to tangible book value.
I reported earlier this week on the Santander UK Group Holdings plc 1Q25 update (Santander UK plc’s numbers are not historically vastly different and we don’t get 1Q accounts for this entity) that a RoTE of 12.4% was delivered in 1Q - which compares favourably to the FY24 8.8% RoTE print due to no further provision taken in relation to historical motor finance commission payments (beyond the £295m charge taken in 3Q24). I went on to note that the end-1Q25 CET1 capital ratio of 14.7% was broadly stable q/q (end-FY24: 14.8%) and that if we assume that Santander UK Group Holdings plc were operating with an estimated ‘normalised’ average CET1 capital ratio of 13.0% in 1Q (min. requirement excl. P2B is 11.2%), then that would imply a RoTE of c.14%, which is a respectable level of return - though below the group 1Q RoTE of 15.8% and the guided FY25 group RoTE of 16.5%. Offering just over 1x tangible book value for a business generating a 14% RoTE (to the extent those returns are sustainable - and to the extent that most of the excess capital was retained by the vendor in any such transaction, which seems a reasonable assumption) implies a high required return on equity for the acquirer when benchmarked against public UK bank stock trading multiples and it’s not surprising that a deal was not struck at that level. However, if you look back through the acquisitions struck by the large cap UK banks in recent years, most have been excellent deals at relatively thin multiples so the appetite to pay a price that is sufficiently attractive to get Banco Santander to trade (1.2x+ TBV perhaps?) is likely to be lacklustre at best. Why not buy OSB Group (OSB) instead, for example! I explored Santander UK in depth - including perspectives on the potential buyer universe - in Financials Unshackled Issue 31 on 29th January last here.
Monzo IPO news report
Sky News reported yesterday here that Monzo is set to appoint investment bankers within months ahead of a potential IPO, potentially as soon as 1H26. Sources indicated to the newspaper that an IPO would be likely to value Monzo at more than £6bn and, potentially, in the £7bn territory. The article also notes that London is seen by Monzo Board members and investors as the most likely listing venue.
While no firm decisions - in terms of timing, valuation range, and listing venue - have been made yet, it seems clear that the Board is indeed working towards an IPO (this is by no means the first time that there have been press reports on Monzo’s IPO intentions). An IPO process would be a key test for how the public markets perceive digital bank propositions that have been successful at building a large user base - but who have yet to truly capitalise on those user numbers in profitability terms. I have opined in the past that customer trust is an enormous barrier for new digital players to overcome in a maturity transformation business build context (though I see Chase as the ‘exception to the rule’ here), with a substantial disparity between user numbers and active primary bank account users. Last year’s BBC Panorama documentary on Revolut (as well as the numerous press articles on the same topic that preceded that show) as well as latest Financial Ombudsman Service (FOS) data for 2H24 published on Tuesday last here (which don’t paint Monzo in a favourable light relatively speaking) provide some indication of the challenges these players face in this context. Choosing London as the IPO listing venue would also be a key test for future prospective digital and challenger bank IPOs (e.g., Revolut, Starling, Shawbrook, etc.) though it is unclear as to whether that is the right market to elicit a ‘quasi-tech company’ valuation given the dividend capability focus of the prospective domestic long only investor base.
Metro Bank 1Q25 trading update
All in all, a reassuring 1Q25 update from Metro Bank (MTRO) on Thursday 8th May in the context of: i) a strong pick-up in underlying profitability and the delivery of core corporate and commercial loan growth - which evidences that the asset rotation and deposit optimisation strategy is working; and ii) the comment to the effect that MTRO remains firmly on track to meet guidance, which is reassuring language.
Key highlights for me were:
Reassuring to learn that 1Q25 was profitable on both a statutory and an underlying basis.
The statement notes that there was a significant increase in underlying profit versus 2H24 (£12.8m) owing to structurally higher NIM - which evidences that the asset rotation and deposit optimisation strategy is working.
While MTRO has a growth strategy it is important to note:
The reduction in net loans of -3% q/q (-£548m q/q) reflects the disposal of the £584m non-core unsecured personal loans portfolio as well as the continued run-off of the remainder of the consumer lending (c.£150m at year-end, stripping out the £584m UPL portfolio) and government-backed lending (£653m at year-end) portfolios - so, there is some core net loan growth coming through too. Indeed, the statement references "further growth in our corporate and commercial lending" - and notes that year-to-date drawdowns are already >40% of total new lending in FY24
Deposits were -4% q/q. This is a good thing. Funding cost optimisation is the real win here and, with a loan-to-deposits ratio of just 61% at end-1Q, there is a long road to travel here. MTRO will see its share of deposits represented by low cost current accounts increase over time .
The statement notes that, following the recent AT1 issuance, the Tier 1 capital ratio has been substantially strengthened (17.5% pro forma at 31st Dec vs. 13.4%). While this provides further flexibility for growth it could also be potentially seen as an astute move ahead of any potential changes to the MREL regime - indeed, it is possible that MTRO falls out of the regime altogether if the Chancellor presses ahead to effect sensible wholesale changes in this vein.
TSB 1Q25 update
TSB (owned by Sabadell) reported on Thursday 8th May that statutory profit before tax (PBT) almost doubled y/y to £101.3m in 1Q25, which also represented a further uplift of 7.1% q/q on the £94.6m outturn in 4Q24. RoTE for the quarter came in at an impressive 14.0%, which screens well against the wider sector - and, notably, rolling 12M RoTE was 12.1%. The growth in profitability was supported in the main by: i) income growth, which was +14.4% y/y - with the structural hedge contribution an important tailwind in this respect; ii) continued strong cost reduction delivery with opex -4.7% y/y, owing to stringent cost control measures as well as the implementation of strategic initiatives (notably, the Cost/Income ratio reduced by 12.5 pps y/y to 62.4%); and iii) relative stability in credit impairment charges (cost of risk: 18bps). TSB finished the first quarter with a strong capital position, reporting a CET1 capital ratio of 15.2%. The press release is available here and the Sabadell 1Q25 slide deck (available here) also picks up on some TSB-specific financial data, noting that "TSB continues improving its profitability and contribution to the group".
AIB Group directed buyback
AIB Group (AIBG) AIBG announced on the morning of Thursday 8th May that it has agreed with the Minister for Finance to make an off-market purchase of almost 192 million shares for total consideration of €1.2bn (c.8.2% of the issued share capital).
There had been much speculation in the market as to whether this directed buyback would take place given that the share price had been trading below the minimum price at which the buyback would be executed of 626c (as set out in the AIBG AGM documentation) - for example, the share price closed on Wednesday at 620c, which was 1% below the minimum DBB execution price.
The Board and AIBG's UK sponsor (Morgan Stanley) have concluded that the off-market purchase is "fair and reasonable as far as shareholders of AIB are concerned". Given the minor difference of just 1% between Wednesday's closing price and the DBB price this is not entirely surprising as the wider shareholder base is likely to perceive some benefit attached to the swifter exit of the State from the register - partly because this paves the way for remuneration normalisation, thereby supporting top executive retention. Indeed, any further adverse geopolitical developments et al. could have delayed the State's exit even further if the DBB didn't go ahead. he share price held up strongly in trading on Thursday and Friday.
Immediately following the transaction, the Minister owned just 3.3% of the outstanding issued share capital and I expect that the State will be fully off the register within a few months. Additionally, while it is premature to be conclusive at this juncture, it does now appear very likely - when one takes into account the likely valuation of the warrants owned by the Minister - that the State will retrieve the full €20.8bn it invested in AIBG.
ECB stress tests
Bloomberg reported on Tuesday here that the current stress test on European banks is on track to deliver a lower hit to capital ratios than the previous one, partly as a result of the strength of bank profitability in 2023/2024. More specifically, sources indicated to the news agency that initial submissions made to the ECB by individual lenders in at least three countries show that the hit to capital ratios is lower than at the same stage of the previous test. A spokesman for the European Banking Authority (EBA) noted to Bloomberg that “As the exercise is in progress, the comments made are speculative at this stage” while an ECB spokesperson declined to comment.
It is no great surprise to learn that the initial modelled outcomes are more favourable than at this stage during the last stress test in 2023 - following two years of strong profit generation in a higher rate backdrop. That said, it is early days in the context of the test, which is a work-in-progress. Still though, the news report provides some initial comfort regarding the ultimate outcome.
Other Notable Newsflow
Other UK Highlights:
The BoE is proposing to discontinue limits on lending and treasury activities for building societies that were introduced in the wake of the Global Financial Crisis (GFC). See Consultation Paper CP11/25 from Thursday 8th May here, the transcript of Charlotte Gerken’s speech here, and a helpful FT article here.
Barclays (BARC) reported here on Wednesday on the results of its AGM, which saw all proposals heavily supported by the voting shareholders - including the bank’s refreshed executive remuneration policy which sees key executives forfeit an element of fixed pay for more variable financial upside (those proposals received support of 96.98% of the voting shareholders).
Sky News reported on Friday afternoon here that the proxy adviser ISS has recommended that Metro Bank (MTRO) shareholders vote against its remuneration policy and Shareholder Value Alignment Plan (SVAP) at its AGM on 20th May - with ISS reportedly observing that the share award plan has the “potential to deliver outsized rewards”. You can locate MTRO’s AGM Notice (dated 23rd April) here which summarises the key terms of the share award plan. I can understand ISS’s rationale here given that the upper potential payouts to management are exceptionally high and, undoubtedly, many will see it as egregious in terms of extent. That said, the upper end of these payouts (which has attracted media attention) are contingent on the share price almost quadrupling from current levels, which would be an extremely satisfactory outcome for shareholders - in what is an idiosyncratic turnaround situation (i.e., ‘a first world problem’ in a unique situation if the upside, which the market doesn’t see, manifests). Furthermore, while there is no denying ISS’s argument to the effect that “The use of share price targets, in general, may not necessarily reflect management performance”, they are a well-established incentive tool that generate alignment of interest.
Sky News reported here on Monday evening that Nationwide is commencing a search process for a new Chairman to replace Kevin Parry, who has chaired the Board since 2022. It is reported that Parry is not expected to leave imminently but it’s possible that a succession plan could be confirmed at or before the society’s next AGM in July. A number of potential candidates spring to mind!
The Irish Times reported on Thursday here that Ulster Bank (NWG) is on track to return its banking licence in the Republic of Ireland in the coming months following the transfer of unclaimed customer deposits to a trust.
Together Financial Services published 3Q24 results (for the three months to 31st March) on Thursday here, which show that the business is continuing to perform strongly - with continued loan book growth (+10.3% y/y to £7.8bn) and expansion in u/l Profit Before Tax (PBT) to £57.5m, +11.0% y/y.
Other Irish Highlights:
The Wall Street Journal reported on Thursday that JPMorgan analysts have issued a note of caution on Irish banks given the uncertainties in the year ahead in their post-1Q trading updates research. The newspaper reports that the analysts refer to uncertainties stemming from US policy risks and their potential longer-term implications for the Irish macro - which, of course, is entirely valid (indeed, to add my tuppence worth to the politics, I think the EU will struggle to get a satisfactory ‘trade deal’ by 8th July so I would be braced for some swings in sentiment - though that doesn’t mean a deal won’t be done in later months). The analysts also point to risks from official rate cuts given the high rate sensitivity of Irish banks - a factor that is already very well-understood by the market.
The Irish Times reported on Friday on the news that AIB Group (AIBG) has raised $750m from the issuance of a senior non-preferred bond on Thursday at a coupon of 5.32%. Demand for the issue was reported to be extremely strong - with orders of >$6.5bn, meaning the bond issue was more than eight times oversubscribed, which supported tightening the pricing from initial price talk (IPT) of UST+165bps. This is a strong vote of confidence in the strong capitalisation of the bank and in the expected resilience of its profitability in what is a concentrated market.
The Irish Times reported here on Thursday on Finance Ireland’s FY24 accounts, which reportedly (accounts are not available on the Companies Registration Office yet) show that Profit Before Tax (PBT) was +95% y/y to €20.3m on the back of higher lending volumes (net loans were +14% y/y to €1.2bn) and reduced funding costs. It has been reported that PTSB has engaged in discussions to acquire Finance Ireland but that price has been an obstacle. I recently reported that Sretaw, which has a 7% shareholding in PTSB, has reportedly claimed that Finance Ireland would find it difficult to command a valuation in excess of €100m unless recent results and the business plan were to “show a step change in prospects”. The reported profitability for FY24 may change the dialogue here (the press reports thus far don’t suggest that anything beyond conversations with the benefit of public information only have taken place thus far, i.e., it seems highly unlikely that PTSB has been doing due diligence and this information is therefore likely to be new information for PTSB and any other potentially interested parties) and it appears that PTSB remains potentially interested given the CEO’s remark at Friday’s AGM to the effect that Finance Ireland “is a fine business”.
Other Global Highlights:
Bloomberg reported on Wednesday here that the ECB has indicated its support for a twin-track implementation of new trading rules under the Fundamental Review of the Trading Book (FRTB). The news agency picked up on an ECB contribution to the EC’s consultation here where its staff suggested letting banks choose whether to apply the new rules in 2026 or wait until 2027.
The Chair of the Single Resolution Board (SRB) Dominique Laboureix spoke on Thursday on how solid frameworks and cooperation are critical elements in the context of the resilience of the banking sector. Quite a topical point and you can access the transcript here.
W/C 12th May Calendar
Wed 14th May (07:00 BST): Vanquis Banking Group (VANQ) 1Q25 Trading Update
Wed 14th May (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates - Mar 2025
Thu 15th May (07:00 BST): Secure Trust Bank (STB) 1Q25 Trading Update
Thu 15th May (11:00 BST): Lloyds Banking Group (LLOY) AGM
Thu 15th May (11:00 BST): Secure Trust Bank (STB) AGM
Thu 15th May (12:00 BST): Funding Circle Holdings (FCH) AGM
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